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Regulation and Compliance > Federal Regulation

FINRA Releases Restricted Firm Compliance Tool

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What You Need to Know

  • The tool helps BDs determine whether they meet the preliminary criteria to be designated as a restricted firm.
  • Restricted firms may be required to deposit cash into a segregated account to cover potential future regulatory fines.

The Financial Industry Regulatory Authority has released a Rule 4111 compliance tool to help broker-dealers determine whether they meet the preliminary criteria to be designated as a restricted firm.

Rule 4111 (Restricted Firm Obligations) sets extra requirements for broker-dealers with a significant history of misconduct, including firms with a high concentration of high-risk brokers.

Restricted firms may be required to deposit cash into a segregated account to cover potential future regulatory fines.

The tool, which resides in the FINRA Gateway, provides reports of:

  • the annual calculation of whether the member firm met the preliminary criteria for identification, including its preliminary identification metrics, as of the evaluation date for a given year; and
  • interim calculations as of an evaluation date for that given year.

The interim calculations are generated for informational purposes only; whether a member firm will meet the preliminary criteria for Identification as of the evaluation date in the annual calculation could change based on subsequent events.

Each year’s report of the annual calculation will be issued shortly after the Rule 4111 annual calculation is conducted for that year, FINRA explains.

Prior to each year’s report of the annual calculation, FINRA generally expects to issue three reports of interim calculations for that given year, at regular intervals.

In mid-April, FINRA released frequently asked questions guidance on the rule.

On June 1, FINRA started the process to determine which of the 3,400 broker-dealer firms under its purview meet the preliminary criteria to be categorized as a restricted firm under new Rule 4111.

Rule 4111 became effective on Jan. 1.